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Hansen Aise Im Ch10
Hansen Aise Im Ch10
Hansen Aise Im Ch10
10 SEGMENTED REPORTING
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LEARNING
LEARNING OBJECTIVES
OBJECTIVES
LEARNING GOALS
2
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Explain how & why firms choose to
decentralize.
2. Explain the difference between absorption
& variable costing, & prepare segmented
income statements.
3. Compute & explain return on investment
(ROI).
Continued
3
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
4. Compute & explain residual income &
economic value added (EVA).
5. Explain the role of transfer pricing in a
decentralized firm.
5
QUESTIONS TO THINK ABOUT:
Galactic-Media Inc.
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QUESTIONS TO THINK ABOUT:
Galactic-Media Inc.
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QUESTIONS TO THINK ABOUT:
Galactic-Media Inc.
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LEARNING
LEARNING OBJECTIVE
OBJECTIVE
1
Explain how & why
firms choose to
decentralize.
9
LO 1
What is a responsibility
accounting system?
A responsibility accounting
system measures the results of
responsibility centers according to
information managers need to
operate their centers.
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LO 1
CENTRALIZATION &
DECENTRALIZATION
EXHIBIT 10-1
12
LO 1
REASONS FOR
DECENTRALIZATION
13
LO 1
DIVISIONS IN DECENTRALIZED
FIRM
Decentralization achieved by creating divisions
by
Type of goods & services
Geographic lines
Type of responsibility given to divisional manager
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LO 1
RESPONSIBILITY
RESPONSIBILITY CENTER:
CENTER:
Definition
Definition
15
LO 1
RESPONSIBILITY CENTERS
Major types of responsibility centers are:
Cost centers
Manager responsible for cost only
Revenue center
Manager responsible for sales only
Profit center
Manager responsible for sales & costs
Investment center
Manager responsible for sales, costs, & capital
investment
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LEARNING
LEARNING OBJECTIVE
OBJECTIVE
2
between absorption &
variable costing, &
prepare segmented
income statements.
17
LO 2
INVENTORY
INVENTORY VALUATION:
VALUATION:
Background
Background
Units in beginning inventory 0
Units produced 10,000
Units sold ($300 per unit) 8,000
Variable costs per unit
Direct materials $ 50
Direct labor 100
Variable overhead 50
Fixed costs
Fixed overhead per unit produced 25
Fixed selling & administrative 100,000
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LO 2
ABSORPTION COSTING
Direct materials $ 50
Direct labor 100
Variable overhead 50
Fixed overhead per unit produced 25
Unit product cost $ 225
20
LO 2
VARIABLE COSTING
Direct materials $ 50
Direct labor 100
Variable overhead 50
Unit product cost $ 200
21
LO 2
COMPARATIVE INCOME
STATEMENTS
Income lower under
variable costing
where fixed costs are
expensed for period.
EXHIBIT 10-6
22
LO 2
ABSORPTION INCOME
STATEMENT
Sales ($300 x 8,000) $ 2,400,000
Less Cost of goods sold 1,800,000
Gross margin $ 600,000
Less S&A expenses 100,000
Operating income $ 500,000
CGS =
8,000 x $ 225 = $ 1,800,000
23
LO 2
24
LO 2
If
If more
more is
is sold
sold than
than produced,
produced, variable
variable
costing
costing income
income >> absorption-costing
absorption-costing
income,
income, opposite
opposite of
of Fairchild
Fairchild
situation.
situation. Equal
Equal production
production & & sales
sales
means
means equal
equal income.
income.
25
LO 2
EXPLANATION
The
The difference
difference between
between variable
variable costing
costing
&& absorption
absorption costing
costing year
year to
to year
year is
is
equal
equal to
to the
the change
change in in fixed
fixed overhead.
overhead.
Under
Under absorption
absorption costing,
costing, fixed
fixed
overhead
overhead is is assigned
assigned to to inventory
inventory
produced.
produced. Under
Under variable
variable costing,
costing,
fixed
fixed overhead
overhead is is aa period
period expense.
expense.
26
LO 2
27
LO 2
SEGMENT:
SEGMENT: Definition
Definition
Is a subunit of a company of
sufficient importance to warrant
performance reports.
28
LO 2
DIRECT
DIRECT FIXED
FIXED EXPENSES:
EXPENSES:
Definition
Definition
29
LO 2
COMMON
COMMON FIXED
FIXED EXPENSES:
EXPENSES:
Definition
Definition
30
LO 2
COMPARATIVE INCOME
STATEMENTS
Segment margin is
contribution to firm’s
common fixed costs.
EXHIBIT 10-11
31
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
3
Compute & explain
return on investment
(ROI).
32
LO 3
FORMULA: ROI
ROI relates operating profits to assets
employed.
33
LO 3
34
LO 3
ALPHA
ALPHA CO.
CO. &
& BETA
BETA CO.
CO.
Background
Background
Alpha Beta
Operating income $ 100,000 $ 200,000
35
LO 3
COMPARING ROI
ROI: ALPHA
= Op. Income / Ave. Op. Assets
= $100,000 / $500,000 = .20
ROI: BETA
= Op. Income / Ave. Op. Assets
= $200,000 / $2,000,000 = .10
36
LO 3
37
LO 3
What is margin?
What is turnover?
CELIMAR
CELIMAR CO.
CO. Background
Background
Sales $ 480,000
39
LO 3
40
LO 3
EXPLANATION: ROI
The
The net
net return
return on
on investments
investments isis driven
driven
by
by 22 independent
independent items:
items: the
the ability
ability to
to
squeeze
squeeze profit
profit from
from sales
sales and
and the
the
ability
ability to
to squeeze
squeeze sales
sales from
from invested
invested
assets.
assets.
41
LO 3
ADVANTAGES OF ROI
42
LO 3
The current ROI is the hurdle rate used to make decisions about changes.
43
LO 3
DISADVANTAGES OF ROI
Can product a narrow focus on divisional
profitability at expense of profitability for
overall firm
Encourages managers to focus on short run at
expense of long run
44
LO 3
ALTERNATIVES: ROI
45
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
4
Compute & explain
residual income &
economic value added
(EVA).
46
LO 4
RESIDUAL INCOME
Residual income is the difference between
operating income and minimum dollar return
on sales.
Residual Income
= Operating income
– (Min. rate of return x Ave. Operating Assets)
= $48,000 – (0.12 x $300,000)
= $12,000
47
LO 4
* 10%
48
LO 4
ADVANTAGES &
DISADVANTAGES: Residual Income
49
LO 4
50
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
5
Explain the role of
transfer pricing in a
decentralized firm.
51
LO 5
TRANSFER
TRANSFER PRICING:
PRICING: Definition
Definition
52
LO 5
53
LO 5
54
CHAPTER 10
THE
THE END
END
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